Advertising Area

Advertising Area

Egypt’s Economic Crisis Growing

By Sherif Elhelwa Egypt’s political and civil unrest is combining with economic decline to threaten the country’s future. President Mohamed Morsi’s decision to remove government subsidies from some forms of energy and to establish ration cards for gasoline has sparked popular anger. Dozens of Egyptians were injured when thousands of supporters and opponents of Morsi’s …

Egypt’s political and civil unrest is combining with economic decline to threaten the country’s future. President Mohamed Morsi’s decision to remove government subsidies from some forms of energy and to establish ration cards for gasoline has sparked popular anger.

Dozens of Egyptians were injured when thousands of supporters and opponents of Morsi’s ruling Muslim Brotherhood clashed outside the Islamist group’s headquarters in Cairo. Opposition groups want Morsi to make political concessions, including replacing his cabinet with a national unity government, a demand Morsi has rejected.

The decision to begin rationing gas in July is expected to intensify public frustration with Morsi. Private cars will be allocated 150 litres per month; large mass transit vehicles will be allocated 10,000 litres of diesel per year, and heavy trucks will get 100,000 litres of diesel per year.

Those staying within their quota will pay the government-subsidised price of $.13 per litre for 80-octane and $.26 for 90-octane. In comparison, a litre of gas in neighbouring Israel sells for more than $2.00 per litre. But those requiring extra gasoline will have to pay higher prices.

President Morsi has so far been unable to attract international investment and a planned International Monetary Fund (IMF) loan of $4.8bn has been put on hold because of the continuing unrest and lack of reform.

“Once again, politics will trump economics. Morsi is facing a fresh attack on his legitimacy, to which he has responded with a stick rather than a carrot,” said Mohamed Darwazah, a US-based economist. He added: “For two years, this risky tactic has repeatedly met with defiance rather than conformity. It also leaves the government with very little help in bringing spending under control as the cost of borrowing continues to spiral and further imbalances to the economy push Egypt deeper into a balance-of-payments crisis.”

Some economists say the IMF deal will not come through without significant financial reforms in Egypt.

“Egypt needs reforms in subsidies, customs duties, tax system, and transparency,” Executive Director and Director of Research for the Egypian Centre for Economic Studies Magda Kandil said. “Much of the revenue generated from the local gasoline sales is hard to track, and too many entities are involved. Medium size businesses generate profits that aren’t taxed correctly, and politics play a major role in large size businesses delaying payments or avoiding taxes.”

The Egyptian pound continues to devalue and $1 now buys close to EGP 7, up from EGP 6.5 one month ago. Theoretically, that should attract more tourists to Egypt, but the ongoing unrest is keeping many away.

Essential goods such as bread, gasoline and cooking fuel are subsidised. A source in the Ministry of Petroleum, who was not authorised to give his name, said the government is planning to cancel subsidies on cooking fuel as the government is losing millions of dollars each year.

“This is insane, the losses are tremendous,” he told The Media Line.

Morsi has appealed to Gulf States like Qatar and Saudi Arabia to invest in Egypt. Qatar recently bought a majority share in Société General Bank’s Egyptian branch.

A total of $21bn in loans and grants from the United States, Saudia Arabia, Qatar, Turkey, and the European Union are being promised to Egypt, but they will not come through until significant reforms are set in place. Past announcements that subsidies will be cut sparked riots in the streets among Egypt’s population of 80 million.

“Government plans to increase prices for consumers will not be rolled out before parliamentary elections,” Petroleum Minister Ossama Kamal told The Media Line.

Subsidies for petroleum products will reach approximately $18bn for the 2013 fiscal year, according to a Finance Ministry official who spoke on condition of anonymity. “They have intentions to keep [subsidies] at the same levels as last year, or about $18bn,” said the government source.

Energy subsidies aren’t really helping the poor, but rather are going directly to industries that profit from these subsidies. “There are 100 intensive-energy-consuming factories that use 70% of the subsidies, while 95% of the industrial output comes from low-energy-consuming factories,” Minister of Industry and Foreign Trade Hatem Saleh said at a symposium in Cairo.

Price cuts are never popular, and Morsi does not want to alienate the public even further. Yet, without major cuts, it is unlikely that either the IMF bailout or Arab investment will provide the boost Egypt’s economy so desperately needs.